What is the Construction Industry Scheme and how does it work?
What is CIS?
The Construction Industry Scheme (CIS) is a tax deduction scheme which covers any ‘construction operations’ undertaken by any entity in the UK (and Northern Ireland) including the UK territorial waters. Construction operations means any construction contract that includes construction work such as demolition, site preparation, alterations, dismantling, construction and repairs.
Who does it apply to?
Any business or entity (a contractor) that pays any other business or entity (subcontractor) to undertake construction work in the UK (and NI), including the UK territorial waters. An entity can be both a contractor and subcontractor if it makes construction payments and receives construction payments. CIS applies to overseas entities as well as those in the UK.
What is a contractor?
There are two types of contractor:
1) Mainstream contractors:
Businesses and entities that carry on a trade of construction, eg construction companies, building firms etc. must operate CIS.
2) Deemed contractors:
Up until 5 April 2021, deemed contractors were businesses and entities that spend on average over £1m per annum on construction operations in any three year period, eg government departments, local authorities, property investment companies etc. These entities must operate CIS when the construction spend is more than £1m and until it reduces to below £1m on average over three years.
From 6 April 2021 onwards, businesses and entities must test their average spend on construction operations over a rolling 12 month period (ie it is a day-by-day test). As soon as this exceeds £3m, they must register for and operate CIS on any new contracts from that day forward – until the rolling annual average spend drops below £3m when they can deregister.
Are there any exemptions for contractors?
Exemptions may be available for deemed contractors if the construction work being carried out is to a ‘building’ being used for the purposes of the contractor’s own business. This only applies if there is no letting of the property and it is used for the business’ own trade.
What is a subcontractor?
Subcontractors are businesses or entities engaged by contractors to undertake construction work. All subcontractors must be registered with HMRC and will hold a payment status. This may be to receive payment gross or under deduction at 20% (or 30%) - the latter if the subcontractor is not registered for CIS.
What are the obligations of CIS?
A contractor’s obligations are to:
- Confirm any individual subcontractors engaged are truly self-employed and not employees – therefore, the contractor will also need to consider the rules for off-payroll workers – where they apply these will take precedence over CIS
- Verify, contact HMRC, and obtain a payment status and then pay the subcontractor in accordance with these instructions
- If deductions are due, check material costs to ensure they are not inflated
- Complete monthly returns (penalties arise if returns are late or incorrect).
Cost of materials
Where contractors pay subcontractors under deduction, up until 5 April 2021, the CIS deduction is applied to the amount less any cost of materials incurred in the contractual chain.
From 6 April 2021, HMRC have confirmed that where costs of materials are incurred directly by the subcontractor, to fulfil a construction contract, only they will be eligible to offset materials against any amount subject to a deduction.
The changes to these provisions mean that subcontractors will have to provide evidence they have incurred these costs directly, rather than in the contractual chain, so that contractors can confirm this prior to applying any deductions.
VAT reverse charge
From 1 March 2021, the Domestic VAT Reverse Charge for construction services took effect: contractors should considered their obligations when making VAT-able supplies in the UK. Read more
Your next steps
BDO has a wealth of experience and knowledge in this area. We can assist with compliance training, registration or complete the returns for your organisation - please contact Alison Hawkes or Stephanie Wilson.